FHA Loans: Need a Lower Down Payment? Check out FHA Loans

If you don’t have a 20% down payment for a loan, an FHA loan may be for you. FHA stands for “Federal Housing Administration.” If you’ve guessed that the government is involved in an FHA loan, you are right. The federal government pays the lender if a homeowner using an FHA loan goes to foreclosure. Because of this government insurance, lenders are willing to extend these loans with a low down payment – only 3 ½ percent of the purchase price ($3500 for a home with a purchase price of $100,000). FHA borrowers may be able to get the loan even if with credit that isn’t perfect. FHA loans also allow the seller to pay closing costs, which decreases the out-of-pocket expenses you’ll need to buy a home.

Most lenders can issue FHA loans these days as they are very popular. But before you decide on an FHA loan, make sure you know the negatives:

You’ll pay mortgage insurance, and lots of it. Plan for 1 ½% at closing and then another .5% that will be built into your monthly loan payment (these numbers may change, so check with your lender).

You won’t have much of a buffer if housing prices decline and you have to sell. Ask any homeowner who bought a home in 2006 and had to sell in 2008. It doesn’t feel good to come to the closing table with cash when you have to sell a home that is worth less than the loan amount. For many homeowners, the only choice was a credit-wrecking foreclosure or short sale. Make sure you have a good cash buffer when you buy a home. The typical advice for a 3 month salary buffer may not be enough.

FHA loans are not available on some condos. A condo development must be “FHA Approved” before you can get an FHA loan on one of the condo units. To get a list of condo developments, go to https://entp.hud.gov/idapp/html/condlook.cfm .